Bahrain's state of emergency will end a fortnight earlier than planned but industry experts are still unconvinced that the Gulf's smallest economy will regain investors' confidence.
Bahrain moves to repair the damage
Bahrain's move to lift its state of emergency two weeks earlier than planned may provide some relief for the kingdom's business community, but outside investors are now reassessing the risks associated with doing business there.
King Hamad last week called for an end to the state of emergency from June 1 from its original proposed date of June 15. It was declared in mid-March following month-long protests demanding political reforms. The kingdom called in troops from neighbouring Gulf states to help control the demonstrations.
This latest move appears in line with an attempt to showcase the kingdom as stable, but market commentators have said some economic repercussions following the unrest could be irreparable.
The kingdom's main economic body, the Economic Development Board (EDB), chaired by Sheikh Salman bin Hamad, Bahrain's Crown Prince, said it had been a "challenging" period, but that the business community was behind the country.
"International businesses in Bahrain have privately and publicly restated their commitment to doing business in the kingdom," the EDB said yesterday.
The EDB said it had also reached out to more than 300 companies to prevent any severe impact on daily operations.
The government has set aside almost US$3 billion (Dh11.01bn) of its state budget for project expenditure, and enforced key initiatives for the business community, including a rescue programme for small and medium-sized businesses and the suspension of labour fees for six months.
"Bahrain will have to become even more liberal than it was before to maintain investment and prevent it from exiting the country," said John Sfakianakis, the chief economist at Banque Saudi Fransi in Riyadh.
"This is a very difficult task and they need to think outside the box," he said.
Bahrain relied on its self-branded "business-friendly" image to draw in investors until calls for sweeping changes in the way the country is run, which have simmered for several years, erupted in February. It has already suffered early signs of the economic impact.
The economy has been shaken by an exodus of staff from international corporations in the banking and finance industry; the cancellation of the Formula One Bahrain Grand Prix, thought to attract about $600 million into the country; and the sharp fall in neighbouring Saudi Arabian visitors, who account for 75 per cent of all tourists in the country.
Assets held by Bahraini banks specialising in offshore assets fell by 10 per cent to $134.9bn in March, their lowest level in six years, Bahrain's central bank data showed this month.
Bahrain established itself as the Gulf's financial hub in the 1980s, when banks catering to the region's wealth left Beirut because of the civil war. The kingdom's financial sector accounts for about a quarter of GDP and is an important factor in the government's effort to create jobs and diversify away from oil.
But the rise of Dubai and Qatar has created challenges in recent years. Giyas Gokkent, the chief economist at National Bank of Abu Dhabi, said assets of Bahraini banks had already started to fall after a regional property crash in late 2008.
He said Bahrain had been losing ground for several years but further "uncertainty and instability … may impact the financial sector adversely".
Speculation that the US may cancel its trade agreement also threatens to delay long-term recovery for the kingdom.
The agreement went into effect in 2006 and eliminates tariffs on consumer and industrial trade between the two countries. It initiated other reforms that opened Bahrain up to more US exports including agricultural equipment and textiles.
"There is light at the end of the tunnel," said Ghanem Nuseibeh, a political and economic risk analyst and the founder of the Cornerstone Global consultancy. But he said a lot of work had to be done before the kingdom regained investor confidence.
The government would not be able to rely on "business as usual" and would require political and economic measures to give the economy a jump-start, he said.
Oil still makes up a huge part of Bahrain's economy, and with crude trading at its highest in two and a half years, it will not be short of petrodollars.
Revenues from oil are already expected to reach $5bn this year, compared with about $670m from non-oil segments, the latest budget from Bahrain's ministry of finance shows.
An aid package is also expected to pump $1bn into the economy every year for the next 10 years.